Why Apple Inc. (AAPL) Will Become a Trillion-Dollar Company

The market is making new highs seemingly every day. The S&P 500, Nasdaq Composite and other major indices are in uncharted territory, and the stock that value investors doubted is following suit. Apple Inc. (NASDAQ:AAPL) is now worth $720 billion by market capitalization. And improbably, the $1 trillion mark — at $189 per share for AAPL stock, that’s still a lofty 40% away — is at least in the realm of possibility now.

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Also improbably, Apple stock, at around 16 times earnings, is somewhere between undervalued and fairly valued. Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) still believes in the value proposition, adding AAPL shares in the most recent quarter, according to Berkshire’s 13-F filing.

Morgan Stanley has raised its target price on AAPL stock to $154. UBS says Apple shares are worth $138. So the analysts are on board too.

But $189?

How Can Apple Hit $1 Trillion?

If Apple traded at $189 per share without any of its financials changing, that would assume a P/E that has climbed to about 22 times earnings. That higher multiple would have to reflect investor expectations that iPhone 7 sales are growing, though more likely, that the iPhone 8 will be a smash hit.

That’s plausible, considering the woes of Samsung’s (OTCMKTS:SSNLF) Galaxy Note 7 fiasco, not to mention strong first-quarter iPhone sales.

Another way to look at it is through the revenue lens.

Looking ahead, Apple projects second-quarter revenue of between $51.5 billion-$53.5 billion and gross margin in the range of 38%-39%. The $1 trillion market cap would value the stock at 4 times sales, up from 3.3 times. And it seems unlikely that investors would trade Apple to those kinds of multiples without anything else happening.

Apple needs iPhone sales to grow more than the 5% year-over-year figure last quarter. It certainly needs iPads to reverse a 19% YOY drop in revenue. Services, though, is a huge bright spot, growing revenue from 18% YOY, and the segment is accelerating to become a bigger piece of the revenue pie. Continuing that track would certainly help AAPL’s chances.

iPhone 8 Release

The biggest continuous headline this year is Apple’s 10th anniversary iPhone release, believed to be called either the iPhone 8 or the iPhone X.

Currently, while the market is optimistic about AAPL stock, it’s not pricing in the potential for double-digit revenue growth in iPhone sales on the back of iPhone 8. That would also include reversing the iPhone’s slowing sales in China.

Anything’s possible in China right now, though.

Xiaomi was the leader in Chinese smartphone market share in China in Q1 of 2015. In 2016, Huawei and Oppo took the first and second spot, respectively, in China. Apple’s position dropped sharply to the fifth spot. However, cutting prices of the iPhone 7 and promoting that particular model in the region could help AAPL compete more effectively.

Another Note About Valuation

Even if Apple doesn’t blow the doors off with iPhone 8 sales, the market isn’t against rewarding gigantic tech titans without them boasting breakneck growth.

Microsoft Corporation (NASDAQ:MSFT) trades at a P/E of 30 and P/S of 6. P/E and 6x sales (price/sales). Still, Microsoft is expected to grow earnings by about 7% compared to Apple’s 7.6% expected growth this year, and next year the disparity expands, with analysts projecting 13.5% profit growth from Apple but just 9.4% from Microsoft.

Speaking of corporate software titans, Apple has partnered with International Business Machines Corp. (NYSE:IBM) to develop corporate software. In time, Apple will generate more meaningful revenue from this space.

Bottom Line

Lastly, we’ll discuss Apple’s giant war chest. AAPL has $246 billion in cash, or around $30 a share in net cash. Assuming a 15% repatriation tax (which in theory could go away with a Trump repatriation tax holiday), AAPL will have $23 per share in cash.

This is the company’s buyback activity last quarter:

“We returned almost $15 billion to investors during a very busy December quarter for our capital return activities. We paid $3.1 billion in dividends and equivalents. We spent $5 billion on repurchases of 44.3 million Apple shares through open market transactions. And we launched a new $6 billion ASR, resulting in an initial delivery and retirement of 44.8 million shares.”

Apple currently yields a modest 1.7%. Combined with regular buybacks and debt reduction, AAPL stock holders are getting plenty of value out of Apple’s cash as it is.

I expect Apple to continue moving higher for all of the above reasons, especially if the broader market continues to melt higher.

A lot needs to happen for AAPL stock to gain 40% and reach a trillion dollars in market cap, especially within the next year, but a blowout iPhone 8 release could very well get it done.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/why-apple-inc-aapl-stock-trillion-dollars/.

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